Oil prices have gotten off to a rather pedestrian start to 2023. While they've ebbed and flowed quite a bit, they're roughly flat so far this year, at around $80 a barrel. That's well off last year's peak in the triple digits following Russia's invasion of Ukraine.
Crude prices could remain muted in the near term due to continued macroeconomic uncertainty and some supply and demand dynamics. However, oil appears poised to rebound later this year. This means now might be the perfect time to buy oil stocks, since many have followed oil prices lower in recent months.
The calm before storming higher?
Oil prices have been under pressure for the past few months due to concerns that higher interest rates will slow the global economy. That could sap the demand for oil.
Meanwhile, recent inventory data has added more weight to oil prices. The U.S. Energy Information Administration's (EIA) latest data set revealed a stunning 16 million-barrel climb in weekly oil inventory numbers, due in part to a balance adjustment. That blew past analysts' expectations for a 600,000-barrel build in U.S. oil inventory levels. It also marked the eighth straight week of rising oil inventories, implying that there's more supply than demand.
There's even more supply on the way. The Biden administration plans to sell 26 million more barrels from the Strategic Petroleum Reserve (SPR). That release follows a record 180 million barrels in sales last year to help combat surging oil prices following Russia's invasion of Ukraine.
This sale isn't related to that inflation-fighting release. Congress previously mandated this sale. While the U.S. could have canceled it, that would have required an act of Congress.
These supply related catalysts will likely keep the pressure on oil prices in the near term. However, other drivers could cause a significant swing in the oil market over the coming months.
On the supply side, Russia recently cut its output by 500,000 barrels per day due to the impact of sanctions. In addition, the U.S. plans to refill the SPR eventually. Meanwhile, the U.S. is about to enter the summer driving season, which should spur demand. On top of that, Asian economies are getting back to normal after years of pandemic-related lockdowns.
Despite macroeconomic concerns, the International Energy Agency (IEA) expects oil demand to grow to a record 101.9 million barrels per day this year. However, given current production levels, demand will begin to outpace supply in the second half of the year. The IEA sees a deficit of 1.4 million barrels per day in the third quarter and 1.9 million barrels per day in the fourth quarter. That expected shortfall between supplies and demand should drive oil prices higher.
How to cash in on higher oil prices
The recent slump in oil prices has weighed on shares of many top oil stocks:
One notable decliner isOccidental Petroleum (OXY 0.11%), which is down more than 15% from its peak. Occidental is a favorite of well-known investor Warren Buffett. His company,Berkshire Hathaway, owns over 20% of Occidental Petroleum's outstanding stock. That makes it one of Buffett's largest holdings.
Occidental would benefit from higher oil prices. It would enable the company to generate more free cash flow. After focusing on using its excess cash to repay the debt that it took on to fund its acquisition of Anadarko Petroleum in 2019, Occidental plans to return more money to shareholders in 2023 through dividends and repurchases. It could also start redeeming some of thepreferred stockowned by Berkshire that it used to help fund the Anadarko deal.
Meanwhile, shares of Devon Energy (DVN -0.50%) and Pioneer Natural Resources (PXD -0.20%) are down more than 20% from their peaks. Both have been under pressure due to the impact lower oil prices have on their dividend. Devon Energy and Pioneer Natural Resources pay a fixed-base dividend and a variable dividend based on their quarterly free cash flow.
Devon recently declared its second straight declining dividend payment after its free cash flow fell again in the fourth quarter. However, that payout could see a resurgence this year if oil prices rebound. Likewise, Pioneer Natural Resources' variable payout has fallen along with oil prices. It, too, could pay out a gusher of dividends at higher oil prices this year.
Buy before the rebound
Oil prices have fallen from their peak, largely due to macroeconomic worries. While that weight could remain on oil prices in the near term, crude appears poised to bounce back sharply later this year as demand begins to outstrip supplies in the second half. This means now might be the perfect time to buy oil stocks before the rebound.
Higher crude prices would enable oil companies to generate more free cash flow, giving them more money to return to shareholders. That could help pump up their stock prices.
Matthew DiLallo has positions in Berkshire Hathaway and ConocoPhillips. The Motley Fool has positions in and recommends Berkshire Hathaway and EOG Resources. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
